Tag Archives: ratios

How should we measure the cost of IT?

The short answer is that there is no set answer. It depends.

I’m debating this question with myself as I want to deliver meaningful measurements back my stakeholders as well as create a repeatable view to measure progress over time. Ratios are a common evaluation method for financial accounting. So it seems natural to use ratios to measure the cost of IT in an organization as well. The most common ratio I’ve seen is spending as a percentage of company revenue. This gives a macro level picture of the cost of IT to the company. Gartner and other firms publish IT metrics based on industry data they collect. This doesn’t mean there is a right answer, but it allows companies to see how they compare to others in the same industry.

A challenge is consistent and agreed to measures of the factors in the ratio. In my case there are pockets of technology spending outside of the core IT function due to a decentralized alignment in the organization and profit centers of the business. Should I count all areas of technology spend in the company or only those associated with IT? Companies replying to the metrics survey undoubtedly have similar organizational inputs. So the answers in the survey are not an apples-to-apples comparison. But it may be as close as we can get!

But what’s really important?

Examining the ratio in terms of industry comparison may provide clues to help with determining average profit margin makeup for your company. But it seems to me that examining the ratio within the context of our company goals is as important or more.

Is the company trying to provide more automation through software? If so, then the technology costs may go higher than average to support this push with an expected offset in labor in other areas.

Is the company being positioned for sale? If so then the technology costs may be kept in check to prevent unnecessary open ended investments.

Is the company trying to differentiate itself from competitors through technology solutions or people solutions?

Change the mindset of IT as a cost center.

Looking at IT solely as a cost center is dangerous. The only way to improve cost centers is reduce costs. IT should be as concerned with creating solutions for productivity and revenue gains. So it’s a two-way street.

Tracking IT metrics should also include revenue gains and automation efficiencies. These metrics have a more favorable feeling to them than straight cost ratio. They represent value. I think value gains are tricky to measure as a attribution back to a technology effort. But it provides the basis for continued investment in a “cost center”.

I haven’t settled on a complete answer yet on how to best measure IT. Maybe I never will. I suspect introspection and analysis will lead me towards new questions and then a natural course of tweaking and adjusting. Keep the calculator handy and align processes to aid with measurements. Happy computing.